In what is expected to be a tense showdown with the Chinese government, the SEC has just approved a rule which gives the Public Company Accounting Oversight Board (PCAOB) a framework to de-list US-traded foreign companies if the PCAOB can’t inspect the auditors of those companies and be assured that US audit standards are being followed.
Although the rule applies to US-listed companies in all foreign jurisdictions, its affects are clearly aimed at Chinese companies where there has been a persistent refusal to cooperate with the PCAOB. Currently, the PCAOB cannot review audit documents held in China without approval from Chinese authorities. It is estimated that as many as 270 Chinese and Hong Kong based companies trading on US exchanges could face de-listing by 2024.
The rule outlines a series of steps that the PCAOB will take to determine if foreign jurisdictions are cooperating with its inspections of the audits of US-listed companies.
Although the PCAOB doesn’t have the authority to de-list foreign companies from US exchanges, the Holding Foreign Companies Accountable Act (HFCAA) signed into law in December 2020, does give the SEC authority to ban trading company stock if the PCAOB isn’t getting cooperation.
The HFCAA states: “If the board is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange or through other methods.”
In addition, the HFCAA “requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the board.”
The PCAOB has cooperating agreements with over 50 non-US jurisdictions where it conducts auditor inspections to ensure that accounting firms in those foreign countries are complying with US auditing standards for US-listed companies.
Until now, China has been resistant. “We remain concerned about our lack of access in China and will continue to pursue available options to protect investors and the public interest through the preparation of informative, accurate, and independent audit reports”, the PCAOB states on its website.
The PCAOB website notes that there are 36 audit firms in China that it currently does not have access to inspect.
ESG: One World, One Standard?
The International Accounting Standards Board (IASB) chose the November Glasgow COP26 climate conference to announce the launch of a new entity aimed at creating one standardized set of rules for ESG disclosure.
The goal of the new entity, named the International Sustainability Standards Board (ISSB), is to provide ESG reporting consistency. Currently, companies worldwide looking to adopt ESG disclosure standards must choose from more than 15 sustainability reporting frameworks, each differing in detail and scope of disclosure requirements.
In the US, SEC Chair Gary Gensler says that while he’ll consider global standards, he’s working on his own set of proposals for climate risk disclosures. In a July presentation at the Climate and Global Financial Markets webinar, Gensler said “I have asked SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.”
SEC staff will consider “a variety of qualitative and quantitative information about climate risk. Qualitative disclosures could answer key questions, such as how a company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.”
“Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals,” he said.
In July, SEC Commissioner Hester Peirce issued a statement on the proposed formation of the ISSB saying, the international group’s “gaze has drifted to sustainability reporting.”
Peirce said “I urge the IFRS Foundation not to wade into sustainability standard-setting because doing so would (i) improperly equate sustainability standards with financial reporting standards, (ii) undermine the Foundation’s current important, investor-centered work, and (iii) raise serious governance concerns.”
Crypto Standards in the Works
Though lease accounting standards implementation and LIBOR are taking priority on FASB’s agenda, the standards setter has begun gathering feedback on the question of whether it should start setting new standards for cryptocurrencies.
At a recent conference of Financial Executives International, FASB Chair Richard Jones said his group is reaching out to finance executives and others. “There’s no doubt we get a lot of feedback from different stakeholders on looking at that from a standards-setting perspective,” said Jones, who became FASB Chair in July 2020.
“Not all digital assets are the same,” added Jones. “They don’t all necessarily have the same rights, the same attributes. And there certainly are challenges in dealing with an unregulated market, in determining what accounting makes the most sense — fair value or some other kind of accounting model — not to mention it may vary based on the nature of the activities, holding rights.”
No More Extensions for Lease Accounting
The Financial Accounting Standards Board (FASB) has unanimously rejected a request that would have given private companies and certain non-profit entities an additional two years to comply with FASB’s new lease accounting standards.
The request was made in a letter submitted by the Pennsylvania Institute of CPAs, which argued that private companies and non-profits have been severely disrupted by the pandemic, and needed another extension due to the significant investment of time and resources that implementation requires, which neither private companies nor non-profits have at this time.
FASB rejected this request for a third extension, with CFO Dive reporting that FASB staff recommended against the additional delay saying that there’s no guarantee that private companies will have more resources available to adopt the standard after a delay of two more years.
The publication reported that “FASB members expressed sympathy for the challenges that come with adopting a major standard but said they don’t expect those challenges to get better with time.”
FASB’s lease accounting rule was adopted in 2016 and requires companies to report longer term leases as either assets or liabilities on the balance sheet, rather than in the footnotes, as historically has been done. The first to comply were publicly traded companies. In recognition of the complexities of implementation, private and non-profit entities were given extensions in November 2019 and June 2020.
The effective implementation date for nonpublic entities is for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.
SURVEY SAYS…
Empty Offices
New York City offices are staying empty, with only 8% of workers physically back in the office 5 days a week, according to a just-released survey of major Manhattan employers conducted by the Partnership for New York City, the city’s leading business group.
Thirty-four percent of the 188 employers surveyed say they’ll be decreasing their office space needs over the next five years, with an additional 13% of those employers expecting to reduce their NYC workforce.
Survey respondents said that as of late October, 10% of workers are in the office 4 days a week, 12% come in three days a week, 8% show up one and two days a week. More than half, 54%, of Manhattan office workers are still fully remote.
Employers cited the following reasons for the slow return to the office:
· COVID-19 ranked as the largest factor, with 48% citing it as the primary concern.
· Employees’ preference for remote work ranked second, with 33% of employers indicating it was a primary driver—a marked increase from the Partnership’s June 2021 survey, when only 16% of employers indicated it was a primary driver.
· Challenges for employees with children under the age of 12 who could not be vaccinated when the survey was fielded ranked third, with 14% ranking it as a primary concern.
In an interview with CNBC, the Partnership’s CEO Kathryn Wylde said, “Post-pandemic, remote work is here to stay. There is going to be a permanent relook at keeping offices and jobs in New York City.”
That “permanent relook” is expected to severely impact New York City’s budget. CNBC reports that office vacancy rates in the city are at a 30-year high of 18.6%, with the value of the city’s commercial real estate dropping by $28.6 billion (16.6%). That reduces property tax revenue by up to $1.7 billion this fiscal year, according to a recent report from the New York State Comptroller’s office.
Wylde said that 22% of financial firms surveyed plan to reduce their NYC workforce in the next five years, presenting a “big challenge for the city.” The financial services sector has long been viewed as the economic backbone of NYC, according to CNBC.
